By Sally Pipes
In a much-anticipated hearing last month, Congress asked chief executives from several of America’s major hospital systems to account for the astronomical cost of healthcare in this country. Lawmakers were certainly asking the right people.
Any honest diagnosis of America’s soaring healthcare costs has to place hospitals front and center. Sprawling health systems have managed to pad their own bottom lines through a deliberate strategy of consolidation and policy gamesmanship.
Patients and employers have paid the price.
That’s not, of course, how the hospital executives see things. They pointed to insurers and drugmakers as the real culprits—and complained about administrative costs and inadequate reimbursement from public programs.
In their telling, hospitals are largely reacting to pressures in the system—not contributing to them. But those arguments quickly fall apart under scrutiny.
Hospitals account for nearly one-third of all health spending in the United States— and 40% of the growth in health spending between 2022 and 2024.
Prescription drugs, by contrast, make up about one-tenth of total healthcare spending. And after adjusting for inflation, net drug prices have actually fallen for the last eight years.
Hospitals have proven uniquely adept at raising prices. Since 2000, prices for hospital care have increased by more than 220%, far outpacing overall inflation.
These eye-popping price hikes are made possible by a growing trend toward consolidation in the hospital market.
Over the last decade, hospitals have steadily acquired physician practices and merged with other large systems—and brought about the highly concentrated hospital sector we see today. In 47% of metropolitan areas, just one or two health systems control the entire hospital market.
And in more than 80% of markets, they dominate at least three-quarters of it.
As competition declines, large systems gain the leverage to demand higher prices from insurers—costs that are ultimately passed on to patients in the form of higher premiums, deductibles, and out-of-pocket expenses.
In some cases, hospital mergers have been linked to price increases of 20% to 50%.
Government policies have facilitated this consolidation. Take Obamacare. The law’s architects believed that pushing providers toward greater scale and integration would help control costs. But that vision hasn’t materialized. Instead, consolidation has done exactly what basic economics would predict—reduced competition and driven prices higher.
Medicare’s reimbursement rules tilt the playing field in favor of hospitals.
The entitlement pays more for the same service when it’s delivered in a hospital outpatient department than in a physician’s office or ambulatory surgery center.
Those price differences incentivize hospitals to buy up independent practices.
In some cases, they can bill Medicare at inflated hospital rates for care provided in these newly acquired clinics.
The acquired physicians can also be a lucrative new source of referrals for procedures delivered in the higher-cost hospital environment.
Concern over these practices has fueled a growing bipartisan push in Congress for site-neutral payment reform.
Layer on top of this a regulatory environment that often blocks new entrants and favors incumbent providers. Certificate-of-need laws, for example, require would-be competitors to obtain government approval before opening new facilities or expanding services.
Those rules can give existing hospital systems an opportunity to lobby against the entry of competitors—and should be repealed in the states where they still exist.
Similarly, Obamacare’s effective ban on new physician-owned hospitals protects incumbents from competition—and entrenches their dominance of local markets.
Addressing runaway hospital costs will take more than hearings. It will require policymakers to unwind the very incentives that have encouraged hospital systems to grow larger. Implementing a site-neutral payment reform—whereby Medicare pays the same rate for identical services, regardless of the setting in which they’re delivered—would be a good first step.
Repealing certificate-of-need laws and other regulatory barriers that limit new entrants would also foster competition—and give patients more choices in where they can seek care.
Policymakers helped create today’s high-priced, highly concentrated hospital market. It will take congressional action to bring competition— and with it, affordability and a renewed focus on patients—back to the hospital market.
Sally C. Pipes is President, CEO, and Thomas W. Smith Fellow in Healthcare Policy at the Pacific Research Institute. Her latest book is “The World’s Medicine Chest: How America Achieved Pharmaceutical Supremacy—and How to Keep It.”
